New Cigarette Tax Layer Seen as Potential Boomerang for Attracting Illegal Operators

Jakarta – The government’s plan to add a new layer to the structure of the cigarette excise tariff has sparked fresh debate. The policy is intended to lure illegal cigarette producers into the formal system and curb state revenue leakage from tobacco products. However, several stakeholders warn that the move could open a moral hazard and complicate enforcement of illegal tobacco activity in the field.

The government estimates that revenue leakage from illegal cigarettes amounts to around Rp60 trillion, or about 30 percent of the total potential tobacco excise revenue (CHT). Therefore, authorities say a new strategy is needed to bring illegal producers into the legal channel and start paying excise.

Finance Minister Purbaya Yudhi Sadewa said the government is preparing a new layer in the cigarette excise tariff, targeted to start operating in June 2026. ‘We hope it can start in June. There are still many illegal goods out there. So once it’s in place, they can enter that layer,’ Purbaya told reporters in Jakarta on Monday 4 May 2026. ‘From cigarettes that enter at Rp200 trillion, leakage is around 30 percent or Rp60 trillion. Let’s say we only receive half of it (when applying the new CHT layer); perhaps Rp20-30 trillion could be gained,’ he said.

‘Although the policy opens a transitional space for illegal producers, the government emphasised that law enforcement will still be pursued against operators who continue illegal practices after the new layer is implemented. ’And if anyone tries to game it, I will shut it down for real. That is a serious threat,’ he warned.

The government sees the new layer as part of the national tobacco industry framework. In addition to giving room for small producers to join the formal system, the policy is viewed as a form of fiscal flexibility amid a decline in living standards affecting tobacco product consumption. ‘We still do not know exactly what the new layer will look like to accommodate illegal cigarettes,’ Harris said in an official statement on Thursday 21 May 2026.

According to him, adding a tariff layer could potentially increase state revenue. But the policy is also seen as opening a moral hazard if oversight is not strengthened. ‘That idea may increase CHT revenue, but one must recognise the moral hazard: the illicit cigarette sector has a small capacity,’ Harris said. ‘Suppose its capacity is 100; it purchases excise duty 600; 500 is resold. To whom? To the smaller cigarettes above it. It could even reduce excise revenue,’ he added.

Therefore, Harris argues that adding a tariff layer may not effectively curb illegal distribution unless the root issues of oversight and enforcement are addressed. ‘So it will not reduce illegal activity. In my view, do not add a layer if the moral hazard is like that,’ he said.